Pension Scheme Review – June 2022

‘Keep Calm and Carry On’.

Many of us are no doubt familiar with this now-popular piece of war time propaganda. It was, however, never actually used during war time Britain. It was re-discovered at the turn of the Millennium amongst other unused WW2 poster designs. It was perhaps felt at the time that the slogan ‘Keep Calm and Carry On’ offered little remedy and might even demoralise people given the duress that the public were suffering.

Words must also be chosen carefully now in respect of the times we move through. Many of us will be concerned as to the vastly increased costs and expenses we all face with day-to-day living. In addition, to the impacts these events are having on our Retirement savings and investments.

Since my last review, the world feels like it has undergone a tectonic shift. New developments have emerged, not least the war in Ukraine and the continuing human tragedy we see unfolding. Events in Eastern Europe have helped magnify many of the pre-existing challenges spoken of in these reviews. The grim consequences are now being felt even more powerfully within energy markets and food prices, as we all review domestic budgets around how we run our homes and lives.

For the moment, inflation (currently 9%) dominates many discussions with clients. Central Bank action to help remedy this is being taken later than many would have advised, but it is being taken. These actions will touch us all at some stage with either higher borrowing costs or slowing economic growth. But for now, circumstances both domestic and internationally have come together to create a near perfect storm of hard and soft commodity price spikes coupled with supply-chain disruption stoking an inflationary surge.

This of course is only half the story… Loose monetary policy and significantly increased money supply – undertaken to support economies throughout Covid - has further created the circumstances under which we now see the highest levels of inflation for 40 years.

 As referenced in past reviews, much of the loosening found its way into stock market related investment and equally provided a further boost to residential property prices. We are currently seeing a degree of reversal in equity valuations, and I suspect cooling of property markets (from a UK property perspective at least).

Investors and Pension savers have felt many of the pressures mentioned as global stock markets have retreated in the face of these revised challenges and assumptions. This has been noticeable across markets generally but is felt particularly strongly within the Technology and Growth sectors. As the cost of borrowing, potential recessionary pressures and uncertainty around these issues has built up, so valuations have been squeezed lower.

North American equity markets represent the mainstay of Technology and Growth businesses. These sectors are often attributed with visionary leaders, who see solution and opportunity, where others see barriers.

This sentiment currently appears in retreat as the US Federal Reserve arguably adopts a more robust approach to managing the inflationary threat by both acting out and signalling its willingness to continue to increase interest rates, as a means of battling inflation no matter the consequences to the broader economy. Growth markets do not welcome news of sustained higher borrowing costs, consequently the principal American index (the S&P 500) has fallen 19% this year in US$ terms.  

Global equities and bonds have also not fared well in the face of the challenges outlined. With so called ‘safe-haven’ asset classes performing poorly, we have witnessed the worst sell-off in Government bonds for a century. It must be stressed this is a highly unusual position where we see equity and bond markets suffering in tandem. The issue here returns us to inflation and bringing it back to within acceptable levels, thereby restoring confidence in the ability of Central Banks to manage these issues.

Many commentators are now arguing that the inflationary peak is soon to be reached. Numerous shocks, slowing economies, interest rate increases or the further threat of them is having the desired effect. Some easing of inflationary pressure may well be in evidence in the coming months. Irrespective of this, it is highly improbable that inflation will return to its benign historical level of around 2% in the near-term.

Many of us throughout our financial lives have known little other than an absence of any real inflationary threat. Those with longer memories of the 1970’s may recall the havoc ‘the return of inflation’ can bring. We will all need to be alert to the impact of this new normal.

Many of us will need to get used to managing our finances and investments accordingly, through periods of higher inflation and careful management of cash. Savings rates will offer no solace here as we move through a period referred to as ‘financial repression’. Savers seeking cash deposit returns will find these remain significantly below the rate of inflation, hence the repressive effect on our savings and reserves.  One financial commentator* refers to this process as ‘stealing money from old people slowly’. It was a method used after WW2 to lessen government debt burdens as a proportion of the economy.

Sound financial advice and investment planning will be crucial in this regard. I have spoken with many clients on these topics, and I welcome all discussion with members in talking through these issues, exploring options and strategies which might combat inflation.

It may be of small comfort now, but regular pension and investment saving is a key driver in managing and benefiting from the inflationary pressures highlighted. Asset prices have suffered but pension savers and regular investors can benefit by acquiring more units as a result. Regular contributions are a great way of managing the volatility that markets have undergone for much of this year. Investments linked to stock markets and exposure to well-diversified portfolios can offer an excellent hedge against inflation in the medium term.

Pension Members participate in all of the above and will continue to do so as we navigate what will no doubt remain a challenging 2022.